Gold is a hedge against debasement

Gold doesn’t hedge inflation. Learning this fact messed with my head when I first came across it.
Ask ten people what the role of gold is in a portfolio, and the most common answer you’re likely to hear is: it’s an inflation hedge.
But when you actually look at the data, gold is a terrible inflation hedge. Take pretty much any CPI measure and look at its correlation with gold—it’s weak, to say the least.

For the longest time, this left me confused about what exactly gold was doing in a portfolio. It was clearly doing something. Gold has diversification properties. Adding it to a portfolio of equity and debt can improve the risk-return characteristics of the portfolio. But I didn’t have a satisfying answer for why.

Then I came across something from Corey Hoffstein—I forget whether it was a post or a tweet—that gave me a much better way of thinking about it.
Gold is better understood as a hedge against debasement, rather than a hedge against inflation. Anyway, here’s an excerpt from this post on Corey’s site:

Gold’s tendency to move opposite the dollar comes from where it sits, outside the system that issues it and beyond the reach of any government or central bank. Bitcoin’s link to the dollar runs the same direction but far looser, so its claim rests on that shared independence rather than on any price relationship. Both are non-sovereign currencies, money no government issues and no central bank can expand.

That can sound like an inflation hedge, but the claim is narrower. It may provide no protection when prices rise for reasons unrelated to money, like an oil or food shock. What it guards against is debasement, the value a currency loses when its supply expands or its credibility erodes.

I recently recorded a podcast with Abid on the topic as well: